The Patient Protection and Affordable Care Act (health care reform) limited the ability of health plans to cover over-the-counter (OTC) drugs, permitting reimbursement from flexible spending accounts (FSAs) and health reimbursement accounts (HRAs) beginning January 1, 2011, only when OTC drugs are purchased with a prescription. In a departure from guidance issued last fall, the Internal Revenue Service has announced that debit cards linked to FSAs and HRAs can continue to be used to pay for prescribed OTC drugs, so long as certain procedures are followed.
Flexible Spending Account – Debit Cards and IRS Guidance
These procedures are set out in IRS Notice 2011-5. According to this guidance, after January 15, 2011, FSA and HRA debit cards may continue to be used to purchase OTC medicines or drugs at drug stores and pharmacies, at non-health care merchants that have pharmacies (such as grocery stores with a pharmacy), and at mail-order and Web-based vendors that sell prescription drugs, so long as all of the following conditions are met:
1. Prior to purchase-
a. the prescription for the OTC medicine or drug is presented (in any format) to the pharmacist,
b. the OTC medicine or drug is dispensed by the pharmacist in accordance with applicable law and regulations pertaining to the practice of the pharmacy, and
c. an Rx number is assigned.
2. The pharmacy or other vendor retains a record of the Rx number, the name of the purchaser (or the name of the person for whom the prescription applies) and the date and amount of the purchase in a manner that meets IRS recordkeeping requirements.
3. All of these records are available to the employer or its agent upon request.
4. The debit card system will not accept a charge for an OTC medicine or drug unless an Rx number has been assigned.
5. All other requirements for use of debit cards associated with health plans are followed.
So long as the above procedures are followed, the debit card transaction will be considered fully substantiated at the time and point of sale.
OTC drug purchases made at other vendors that have health-care-related merchant codes (such as hospitals and physicians), and purchases made at “90% pharmacies” (pharmacies for which 90% or more of gross receipts in the prior taxable year were for tax-code-qualified medical expenses), are permitted under a less stringent set of requirements.
Important Information for using your Flexible Spending Account with Merchants that Sell OTC Drugs
Importantly, for other merchants that sell OTC drugs, but which are not covered in the notice (such as a grocery store or convenience store without a pharmacy), an FSA or HRA debit card cannot be used to purchase OTC drugs. Employees need to be aware of this limitation, as well as of the conditions that now must be met to use debit cards for any OTC medication purchases, to ensure that health plan-related debit cards are used properly.